Leverage is using a small amount of money to control a large amount of currency. Most Forex traders and investors buy and sell currency pairs using leverage. The leverage associated with currency pairs is one of the biggest benefits of the forex markets, but also one of the biggest risks. Leverage gives traders and investors the potential to make large profits or large losses. But, if investors manage risk and limit leverage, they could capture the benefits of forex investing, including the ability to trade 24 hours a day and capitalize on different market trends. Leverage works by using a deposit, known as margin, to provide you with increased exposure to an underlying asset.

The best way to understand leverage is through an example of how it affects your profit or loss potential. For example, if you trade with no leverage at all and invest 1 thousand dollars, for every 1% move in the market, you can gain or lose $10, which equals 1% of one thousand dollars.

In comparison, if you were to invest the same 1 thousand and trade using 1:100 leverage, the dollar value of your position would be equal to one hundred thousand dollars.

1% of a hundred thousand equals one thousand, so for every 1% move in the market, you can gain or lose one thousand dollars.